DC Advisory's European Debt Market Monitor

Q4 2018

2018 will likely be seen as the year of ‘private credit’, a trend that has been clear for some time, with the direct lenders dominating the mid-market leverage finance arena at the expense of banks. Whilst private credit fund raising was lower in 2018 compared to the previous year (€22bn in 2018 versus €32bn in 2017), direct lenders have significant dry powder. But, with lower M&A volumes, one of their key challenges remains deployment.

However, terms alone are not enough and direct lenders have sought to distinguish themselves in other ways, such as size. With the larger funds flexing their muscles to compete head on with the syndicated loan or HY bond markets, they are demonstrating they can write large tickets, move quickly and remove syndication and flex risk. Or indeed, moving down the scale, backing smaller but fast growing businesses that will need follow-on funding.

Whilst banks would like to see more senior club deals, super-senior has been the theme this year for them. Less so the traditional super-senior revolving credit facility (RCF) only, increasingly we see banks providing super-senior term debt as a means of deploying more capital, maintaining relationships with borrowers, a chance to pitch for ancillary services, and lower cost of capital for borrowers.

LBO transactions per region

2019 Predictions

So what does 2019 have in store?

Despite the disappointing end to 2018 both in terms of returns for liquid credit and issuance, Q1 2019 appears to be off to a good start with issuance pipelines remaining strong. However, the combination of rising interest rates – notwithstanding the Fed having lowered guidance on hikes and the ECB only tapering towards the second half – and increased political uncertainty across major European economies, means some market volatility is to be expected.

In the mid-market, we expect to see a continued trend amongst banks to favour super senior positions and private credit portfolio managers to take advantage of any liquid market disruption, further disintermediation of the underwritten loan market or indeed the public markets.

Defaults are broadly expected to remain low, partly due to their backward rather than forward looking nature, partly due to the ongoing benign, albeit volatile, credit environment in the first half, and partly due to the flexibility in credit documentation. This last point could present real opportunities for borrowers.

At DC Advisory, we continue to be very busy on the refinancing front, helping borrowers take advantage of opportunistic market windows and situations. However, we are seeing from borrower and shareholders a focus on maximising flexibility in loan documentation and ‘future proofing’ their capital structure.

Interest rates (three month Libor) vs. volatility (VIX)

UK Highlights

There was a slowdown in leveraged loan volume in Q4 2018, which is expected to continue into Q1 2019 as the deal pipeline is impacted by Brexit uncertainty

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